Barclays Plc’s $3 billion of new contingent capital notes, securities designed to ensure taxpayers aren’t forced to pay for banks’ errors, fell for a second day.
The 7.625 percent subordinated 10-year notes were priced at face value and have dropped 2 cents on the dollar to 98 since being priced two days ago, according to Jefferies International Ltd. The notes will be written down to zero if the U.K.’s second-largest lender has losses that reduce its core Tier 1 equity ratio to 7 percent or lower.
The securities were marketed globally and attracted orders of more than $17 billion, with most coming from Asia, Mark Harmer, the head of developed markets credit research at ING Groep NV in Amsterdam, said in a client note. Its size and relatively high price leaves it vulnerable to short sellers, according to Paul Smillie, a Singapore-based bank credit analyst for Threadneedle Asset Management.
“Barclays is a monster of a deal so it’s going to be the most liquid thing out there for some time, and it’s easy to short,” Smillie said. “When Asia closed the Asian retail bid disappeared and U.S. fast money used it as a simple short.”
In a short sale, an investor sells borrowed securities in a bet they can be repurchased at a lower price.
The 7 percent trigger for a complete write-off, rather than conversion to equity, makes Barclays’s bonds more vulnerable to loss than previous issues of contingent capital instruments.
“The bond was priced and structured with an eye to the Asian retail market,” said Harmer at ING. “That’s left little room for maneuver now that U.S. and European institutions appear to be setting the pace.”
Barclays issued its bonds a day before broader credit markets sold off. The Markit iTraxx Financial Index of credit-default swaps linked to the senior debt of 25 banks and insurers has risen two basis points to 184 since Nov. 14 and the subordinated index is up five to 316.5.
The price set for the Barclays contingent note contrasts with that of ABN Amro NV’s 1 billion euros ($1.27 billion) of 7.125 percent bonds due 2022. While both form part of the issuer’s Tier 2 capital, ABN Amro’s are less risky than Barclays’s, because they don’t have the writedown feature that could cause buyers to lose their entire investment. That’s reflected in a BBB+ rating at Standard & Poor’s, against BBB-, two steps lower, for the Barclays bonds.
S&P called the Barclays notes “going-concern” capital, designed to keep the lender in business as it seeks money to recover. Bonds designed to absorb losses before a lender collapses are a product of the 2008 financial-sector crisis, when debt investors were made good while banks had to be propped up by governments to prevent contagion to the wider economy.
“Barclays did itself no favors by marketing the deal over the Presidential election and Veterans Day long weekend,” said Robert Smalley, a strategist at UBS Securities LLC in Stamford, Connecticut, in a note to clients. “The differential between the trigger and stated capital levels should have led to a higher coupon.”
Barclays would have to lose about 10.25 billion pounds ($16.3 billion) to trigger the writedown, according to Simon Adamson, an analyst at independent debt research firm CreditSights Inc. in London.
The ABN Amro bonds were priced at 99.589 cents on the euro to yield 7.18 percent, compared with the 7.625 percent yield on the Barclays deal. They are now quoted at 112.1 cents to yield 5.47 percent, according to Bloomberg generic prices.
UBS’s 7.625 percent contingent notes due 2022 were also priced at 100 at issue in August. The notes are also less risky because they have a 5 percent trigger, meaning losses have to eat away more capital before they are triggered, giving the bank more time to raise cash to prevent the writedown.
The UBS bonds, rated BBB- at S&P, fell 1.12 cents on the euro and are quoted at 108.21 cents to yield 6.47 percent, Bloomberg generic prices show.